Price Floors, Surpluses, and the Minimum Wage
Legislating a Minimum Wage Creates Unemployment
Last month I discussed the distorting effects of government-imposed price ceilings. Not content to limit the disruptive impact on economic decisions to price ceilings, governments are also quite willing to impose floors under which prices cannot legally fall. Like price ceilings, price floors disrupt market cooperation and have consequences quite different from those advertised by their advocates. Before considering an example of price floors—minimum wages—let’s examine the problem in general terms.
Creating Surpluses
The standard downward-sloping demand curve, D, and upward-sloping supply curve, S, are shown in the nearby figure. As discussed in my column on demand and supply two months ago, these two curves determine an equilibrium price, P*, that coordinates the decisions of all consumers and suppliers. At P* consumers want to purchase exactly the amount that suppliers want to sell.
Despite the amazing coordination that results from the equilibrium price, politicians are often convinced by organized interests that some suppliers should receive higher prices. Interestingly, as we shall see, those who lobby for higher prices are not always the ones who will receive them. But regardless of the source of the pressure, the political response is often to impose a price floor, such as PF in the figure.
With PF being the lowest price that can be legally charged, suppliers are anxious to sell QS units of the product. But at PF, consumers are willing to buy only QD units. The result is a surplus given by the difference between QS and QD. The appropriate response to a surplus is some combination of reduced supply and increased consumption. In a free market, suppliers communicate their frustration at not being able to sell all they would like by lowering the price they charge. As the price declines below PF, consumers increase their consumption and suppliers reduce their production. This mutual adjustment continues until the price reaches P*, where producer and consumer decisions are perfectly coordinated. But the price floor, PF, blocks that communication between suppliers and consumers, preventing them from responding to the surplus in a mutually appropriate way.
Suppliers Can Be Worse Off
Consumers are clearly made worse off by price floors. They are forced to pay higher prices and consume smaller quantities than they would with free-market prices. But price floors can also make suppliers worse off. Some suppliers can benefit from a price floor if they can sell all, or most, of the quantity they would like at that price, but then other suppliers will be even less able to sell as much as they desire.
Only if all suppliers of a product can sell as much as they want at the price floor is it possible for them to be better off as a group, and then only temporarily. Farmers favored price supports for crops because the federal government stood ready to purchase the supply that farmers couldn’t sell at the above-market price. But even in this case, the benefit to suppliers was only temporary since competition among farmers increased the cost of doing business. For example, the lure of above-market prices prompted farmers to bid up the price of land. That is, the price of land incorporated the benefits of the price supports. Those who owned good farmland before the programs started won windfall benefits, but those who entered farming afterward and paid inflated land prices did not.
The Minimum Wage
A good example of how price floors can harm the very people who are supposed to be helped by undermining economic cooperation is the minimum wage. Legislating a minimum wage is commonly seen as an effective way of giving raises to low-wage workers. Unfortunately, it, like any price floor, creates a surplus. In this case, it is a surplus of workers (suppliers of labor), more of whom are willing to work in minimum-wage jobs than there are employers (demanders) willing to hire at that wage. We call a surplus caused by the minimum wage “unemployment.”
A wage floor hits workers with limited skills, primarily young people. According to The Economist, in 1997 the average unemployment rate among workers under 25 was three times greater than the average unemployment rate among those 25 or older (June 27, 1998). Young people are best able to improve their economic prospects by developing skills that increase their productivity. For those with the fewest advantages, the best hope is work experience and on-the-job training. The minimum wage reduces the number of people employers will hire for what is essentially training.
Consider also that the minimum wage reduces the cost of discriminating on non-economic grounds in hiring. With more young people applying for jobs than employers want to hire, and with no legal way of paying a lower wage, it costs nothing to exclude some applicants from consideration. If an employer has a choice between hiring the mayor’s son or a poor kid from the other side of the tracks who would be willing to work for less, the mayor’s son is almost sure to get the job.
The young person from an affluent family can expect to have connections that make it possible for him to get a minimum-wage job before heading off to college, or a part-time minimum-wage job while in college. The poor kid whose education in an inner-city public school makes going to college unlikely, and whose best hope for gaining skills is job experience, is less likely to get a job because of the minimum wage. This kid would have a far better chance if he could communicate his willingness to work by accepting the lower wage that is now outlawed. It should surprise no one that the unemployment rate for nonwhite teenagers is several times the rate for white teenagers.
The political demand for the minimum wage does not come from low-wage workers. Today labor unions are the most active supporters of increasing the minimum wage. Unskilled nonunion workers can compete with skilled union workers only by offering their services for less. Increasing the minimum wage limits this competition, allowing union workers to demand higher wages than would otherwise be possible.
Comment by Rafay Mahmood on 2 October 2009:
Very informative and complete article, if you are only looking at the negative impacts of Price Floors. Please also try and cover the advantages of Price Floors if possible.
However, still an amazing article!
Comment by a1339355 on 5 February 2012:
I’ve said that least 1339355 times. SCK was here
Comment by beachfront condos in sarasota on 5 February 2012:
As a Newbie, I am always browsing online for articles that can benefit me. Thank you
Comment by Scotty Fellers on 6 February 2012:
I have witnessed that sensible real estate agents everywhere you go are getting set to FSBO Marketing. They are realizing that it’s in addition to placing a sign post in the front area. It’s really pertaining to building human relationships with these traders who later will become buyers. So, when you give your time and efforts to helping these traders go it alone : the “Law connected with Reciprocity” kicks in. Great blog post.
Comment by ciclopirox on 6 February 2012:
Please let me know if you’re looking for a article writer for your blog. You have some really great posts and I believe I would be a good asset. If you ever want to take some of the load off, I’d love to write some content for your blog in exchange for a link back to mine. Please send me an e-mail if interested. Regards!
Comment by canterbury electricians on 6 February 2012:
Hello very nice website!! Guy .. Excellent .. Wonderful .. I will bookmark your web site and take the feeds additionally¡KI’m glad to search out a lot of useful info right here in the put up, we’d like work out extra techniques in this regard, thanks for sharing. . . . . .
Comment by fotografia slubna bydgoszcz on 6 February 2012:
salut,
in ultimy 5 ani am aterizat pe Schiphol de nenumarate ori cca 5 ori/an in drum spre dk unde aveam cursuri… de fiecare data, indiferent de compania cu care zburam “turbulentele” faceau parte din programul artistic oferit de compania aeriana.
cred ca ai dreptate cu privire la fobia de zbor ori devi uber religios ori nu-ti mai pasa.
Ce ma distreaza este ca fiecare isi da cu presupusul nu am vazut inca din lista de teorii nimic ref la un atac terorist makes me wonder y?!
Cred ca cel mai intelep este sa asteptam cele 30 de zile si pana atunci sa privim din umbra, cu interes desigur, desfasurarea evenimentelor.
Comment by Eugene Leitz on 6 February 2012:
I as well believe so , perfectly composed post! .
Comment by photocopier london on 6 February 2012:
You actually make it seem so easy with your presentation however I to find this topic to be actually one thing which I believe I’d never understand. It seems too complex and extremely broad for me. I am having a look ahead on your next put up, I¡¦ll try to get the hang of it!
Comment by Robbyn Heaviland on 6 February 2012:
I simply needed to thank you so much all over again. I do not know the things that I might have handled without the actual secrets discussed by you over such industry. It truly was an absolute frustrating scenario in my opinion, nevertheless taking note of the very specialized mode you processed the issue made me to jump with gladness. Now i’m happy for your assistance and in addition sincerely hope you know what an amazing job you’re getting into instructing men and women with the aid of your website. I’m certain you haven’t encountered any of us.
Comment by san diego search engine optimization on 6 February 2012:
I truly appreciate this article post. Much thanks again. Really Great.
Comment by buy sell and loan on 7 February 2012:
Thanks for taking the time to discuss this, I genuinely feel strongly about it and adore learning extra on this topic. If attainable, as you obtain experience, would you thoughts updating your blog with additional data? It truly is extremely useful for me.
Comment by san diego seo firm on 7 February 2012:
I enjoy reading post. Hope i can uncover far more articles like this one. Thanks for posting.
Comment by Cheap Moncler Jackets on 7 February 2012:
good day,buddy, your post is useful to me
Comment by hens night on 7 February 2012:
thanks !! very helpful publish! http://www.thepartybus.co.nz
Comment by Live Answering Service on 7 February 2012:
Its great as your other articles : D, appreciate it for putting up.
Comment by Valentine Hilborn on 7 February 2012:
I have realized that car insurance firms know the automobiles which are prone to accidents and various risks. Additionally , they know what form of cars are given to higher risk and the higher risk they have the higher your premium rate. Understanding the basic basics of car insurance just might help you choose the right kind of insurance policy that may take care of your preferences in case you become involved in any accident. Many thanks sharing the particular ideas on your blog.
Comment by kent seo on 7 February 2012:
Good ¡V I should certainly pronounce, impressed with your web site. I had no trouble navigating through all the tabs as well as related information ended up being truly simple to do to access. I recently found what I hoped for before you know it in the least. Quite unusual. Is likely to appreciate it for those who add forums or anything, site theme . a tones way for your client to communicate. Excellent task..
Comment by office photocopier on 7 February 2012:
I together with my guys were found to be looking through the nice techniques from your web page and then instantly I had a horrible suspicion I had not expressed respect to the blog owner for those strategies. Those people appeared to be so warmed to see all of them and already have without a doubt been using these things. I appreciate you for really being so thoughtful and also for deciding on these kinds of perfect subjects millions of individuals are really wanting to be aware of. My personal sincere apologies for not expressing appreciation to you sooner.
Comment by Oram Plus Discount on 7 February 2012:
Hi there! I know this is kinda off topic nevertheless I’d figured I’d ask. Would you be interested in exchanging links or maybe guest authoring a blog article or vice-versa? My website addresses a lot of the same topics as yours and I think we could greatly benefit from each other. If you are interested feel free to shoot me an email. I look forward to hearing from you! Great blog by the way!
Comment by top 10 seo company in india on 7 February 2012:
*An impressive share, I just given this onto a colleague who was performing just a little analysis on this. And he in fact bought me breakfast because I discovered it for him.. smile. So let me reword that: Thnx for the treat! But yeah Thnkx for spending the time to discuss this, I feel strongly about it and really like reading far more on this subject. If possible, as you become expertise, would you mind updating your blog with much more details? It’s highly beneficial for me. Big thumb up for this blog post!
Trackback by stop spam plugin on 7 February 2012:
How to stop spam links…
[...]check below, this solution is used by most website and bloggers.[...]……
Comment by Valentina Chopton on 7 February 2012:
I simply could not depart your site prior to suggesting that I extremely enjoyed the standard information an individual supply in your guests? Is gonna be again often in order to inspect new posts
Comment by Carol Albriton on 7 February 2012:
Thanks for the strategies you have shared here. Moreover, I believe there are some factors that keep your automobile insurance premium all the way down. One is, to contemplate buying cars and trucks that are in the good directory of car insurance providers. Cars which might be expensive are definitely more at risk of being robbed. Aside from that insurance policies are also using the value of the car, so the more pricey it is, then the higher the particular premium you only pay.
Comment by Godaddy coupons codes on 7 February 2012:
Wow, incredible weblog structure! How lengthy have you ever been blogging for? you made running a weblog appear straightforward. The full appear of your site is great, well the content!
Comment by Bajki sbs torrent on 8 February 2012:
I wish to show my thanks to this writer just for bailing me out of this incident. As a result of looking through the world-wide-web and getting solutions that were not helpful, I figured my life was done. Existing without the approaches to the issues you have resolved as a result of the report is a critical case, as well as ones that would have badly damaged my career if I had not come across your blog post. The talents and kindness in touching all areas was excellent. I’m not sure what I would’ve done if I hadn’t come upon such a thing like this. I’m able to at this time look forward to my future. Thanks a lot so much for this impressive and amazing help. I won’t be reluctant to suggest your web site to anyone who needs to have counselling about this topic.
Comment by pantyhose girls on 8 February 2012:
The book is great, but this review is not exactly spot-on. Being a Superhero is much more about selecting foods that heal your body, not just eating meat/dairy-free. Processed foods like those mentioned in this review aren’t what Alicia is trying to promote. In case you aren’t open to sea vegetables (and yes, I’m talking sea weed), just stop at vegan.
Comment by psychic readings online on 8 February 2012:
That is really a beneficial viewpoint, however isn’t make every sence whatsoever dealing with which mather. Any method thanks in addition to i had make an effort to share your current post straight into delicius but it surely is apparently an problem utilizing your websites is it possible to you ought to recheck this. a lot of thanks again.
Trackback by Energieberatung on 8 April 2012:
[...]we came across a cool {site|website|web site|internet site|web page|web-site} {that you|which you|that you simply|that you just} {might|may|may possibly|may well|could|could possibly} {enjoy|appreciate|take pleasure in|get pleasure from|delight …
[...]please check out the internet sites we follow, including this a single, as it represents our picks in the web[...]…
Comment by emc clariion 5048842 on 1 May 2012:
Hmm it seems like your website ate my first comment (it was extremely long) so I guess I’ll just sum it up what I wrote and say, I’m thoroughly enjoying your blog. I too am an aspiring blog writer but I’m still new to everything. Do you have any tips for inexperienced blog writers? I’d certainly appreciate it.